Vacancies jump in Silicon Valley / Rate at 9-year high for industrial buildings

Kelly Zito, Chronicle Staff Writer

Published
4:00 am PDT, Wednesday, April 16, 2003

Hundreds more acres of office and manufacturing space in Silicon Valley, once home to legions of bustling high-tech workers, have turned into empty caverns during the past year.

The overall vacancy rate for industrial buildings, which make up the bulk of the commercial real estate market in Santa Clara County, totaled 18 percent,

or 41.1 million square feet, in the first quarter of 2003, according to a report released Tuesday by Cushman & Wakefield, a New York commercial real estate firm. That's the highest rate recorded in nine years.

The picture isn't much brighter in the office sector. In high-end, or Class A, offices in the northwest portion of the county, vacancies surpassed 61 percent in the first quarter, as scores of hard-hit technology companies consolidated and jettisoned jobs.

Overall leasing activity and rents for both types of space have plunged. Asking rents for high-tech industrial spaces fell 32.2 percent from $1.74 per square foot per month at the beginning of 2002 to $1.18 in the first quarter of this year. For high-grade office spaces, asking rents have tumbled 18.2 percent, from $2.91 per square foot a month last year to $2.38 per square foot in the same period this year. At the height of the Internet boom in 2000, asking rents hovered around $6 per square foot a month.

"We've had so many events, beginning in 2001 -- Sept. 11, the bursting of the tech bubble, the corporate scandals, the war -- that it's just cast a huge cloud over the economy," said Joe Cook, Cushman & Wakefield's senior managing director for Northern California. "Companies just aren't taking risks, and that affects commercial real estate."

Office space is just that, typically floors and floors of cube farms, often populated by computer programmers, insurance agents and lawyers. Industrial space comprises distribution and warehousing facilities, but often includes light manufacturing and biotechnology outfits as well.

The report noted that the completion of one large office building -- the Sobrato Tower in downtown San Jose -- added nearly 400,000 square feet to the already saturated commercial market in the first quarter.

Several large leasing deals were completed during the first quarter, according to the report. Among them: Communications chipmaker Actel signed a contract to lease about 158,000 square feet of industrial space in Mountain View, and McCabe's Quality Foods Inc. leased about 135,000 square feet in Milpitas.

While the brunt of the region's economic downturn in the commercial market has been centered in Silicon Valley, San Francisco also has suffered. In the central business district downtown, the vacancy level edged up to 22 percent, according to a report released earlier this month by Cushman & Wakefield. The average asking rent for Class A space fell 3.8 percent to $30. 60 per square foot a year, which, when adjusted for inflation, is below 1992's rent level. In 2000, asking rents downtown regularly reached more than $75 per square foot a year.

The authors of the report, as well as local economists, say vacancies will continue to rise in coming quarters and may not level until the middle of next year.